Part X: Understanding Relevant Costs for Decision Making 159 Case 10.2: Bradley Rehabilitation Clinic Contribution Margin Key concept: Preparing a contribution margin statement and determining costs relevant for a decision about closing hc Bradley Rehabilitation Clinic (BRC) provides rehabilitation services for patients with a variety of temporary and chronic conditions. BRC is a wholly owned sub- sidiary of McKee Hospital. BRC is currently performing 20,000 rehabilitation sessions per year, which it bills at $100 cach. The clinic contains 20 recently purchased, clectronically controlled exercise stations. Depreciation on these exercise stations totals $100,000 per year. Fixed operating costs (other than exercise station depreciation) total $500,000 per year. Variable costs (such as labor and utilities) arc S60 per training session. McKee Hospital allocates S400,000 per year of its overhead costs to BRC. The following loss statement reflects results for the current year: Revenues (20,000 x $100) $2,000,000 Less: $1,200,000 $100,000 Variable expenses (20,000 x $60) Depreciation expense Other fixed expenses Allocated McKee Hospital overhead expense $500,000 $400,000 $2,200,000 Total expenses Net loss $200,000 McKee Hospital financial analysts have strongly suggested to upper management that BRC be closed due to its losses. As BRC's manager, you disagree with the suggestion about closing but are unsure how best to respond. Assignments 1. Prepare an income statement in a contribution margin format 2. Make a recommendation about whether to continue BRC or close it. Support your recommendation with a well-reasoned argument